The changing Canadian landscape – a story of major airline consolidation, privatisation and ULCC new entrants

It has been all change in Canada this year and this will continue into 2020 as the aviation landscape in the country sees some significant changes. Biggest among them has been Air Canada concluding a definitive agreement to merge with international tourism company Transat in a transaction valued at approximately CAD520 million, or USD399 million. But, another investor, Group Mach, still has desires to break this marriage before it is consummated and whose president Vincent Chiara  has described the acceptance of the Air Canada deal as “disturbing”.

The Canadian flag carrier has announced no intentions to extensively change Transat’s business model upon merging as of yet, but instead plans to “preserve the Transat and Air Transat brands”, while retaining Transat’s office and “key functions” in Montreal. Both companies expect to benefit from the merger through a larger and more global market, a wider scoop of passenger traffic, and the creation of what is hoped to be a leading global leisure travel business.

With Air Canada and Transat well on the way to teaming up and WestJet being acquired by Onex Corporation, Porter Airlines executive chairman Robert Deluce has deemed it necessary to confirm the regional carrier “is not for sale”.

For an airline which controls such a large proportion of the Canadian market as Air Canada does though, it’s difficult not to wonder what this merger between itself and Transat will produce, and how far it will widen the gap between itself and other would be competitors. Air Canada posted an operating revenue of CAD4.453 million (USD3.417 million) in 1Q2019, while WestJet – Canada’s second largest airline – posted a revenue of CAD1.258 million (USD965 million) – just a cool three billion dollar gap.

While Air Canada has had rocky patches in the past, which is only to be expected, it would seem to be slowly on the rise – or at least plateauing – in both operating and passenger revenue gain.

CHART – Visitor arrivals into Canada have been growing year-on-year since 2012, but rates have slowed since peaking in 2016Source: CAPA – Centre for Aviation and Destination Canada reports

Let’s not forget either, Air Canada recently purchased Aimia Canada, which operates the Aeroplan loyalty programme, for approximately CAD450 million (USD345 million), amounting to CAD497 million (USD381 million) in gross transaction proceeds upon closing.

Air Canada hopes to create Aeroplan as “one of the best airline loyalty programmes in the world” when it launches it in 2020. It’s quite normal to hear of airlines talking of what they expect to be the ‘biggest, the ‘best’, and the ‘largest’ in just about everything – but that’s marketing for you. However, it can hardly come as a surprise that Air Canada has established itself with great aplomb within the Canadian market, and while other airlines may rise and fall, we can probably expect Air Canada to continue growing its kingdom and expanding its borders further still. Perhaps it’s time for a challenger.

WestJet will feel it is well-placed to be the main challenger, but is in the midst of several significant changes – most notably placing Boeing 787 widebodies into long haul service and maturing its ULCC subsidiary Swoop. Those initiatives along with others have pressured its financial targets. Senior executives at the airline have stressed that they were not looking to be acquired, but the Onex purchase, if approved, gives the company significant breathing room to execute its long term strategy.

The wave of ULCCs in Canada is an interesting development, a market that has seen many bright prospects fail. Canada is one of the rarer markets in the industry – long dominated by Air Canada and WestJet.

CHART – Air Canada and WestJet together account for almost two thirds of Canada’s system capacitySource: CAPA – Centre for Aviation and OAG (data: w/c 26-Aug-2019)

More recently, the ULCC model has debuted in Canada with Flair Airlines’ transition to the ULCC model and WestJet creating its own ULCC subsidiary Swoop. A third ULCC, Jetlines, plans to make its debut later this year from Vancouver International airport.

There is definitely no shortage of ambition among the new start-ups and some airports are benefitting from more operators entering the market, but point-to-point service between secondary airports in Canada remains a challenge as the ULCCs believe there are traffic stimulation opportunities in some of the larger metropolitan areas.

It is not all about the Toronto, Vancouver and Montreal’s though. Interestingly, the Canadian city of Winnipeg is enjoying the distinction of being named one of Airbnb’s top places to visit in 2019. Airbnb has calculated that searches for Winnipeg increased 140% year-on-year (the report was published in late 2018). Winnipeg was only one of three North American destinations to make the list, joining the Great Smoky Mountains and the Catskill Mountains.

The city’s airport posted annual average passenger growth of +6% from 2015 to 2018 and during 1Q2019 Winnipeg posted a 7.5% increase in passenger throughout year-on-year, with a +9.5% jump in Mar-2019. It is tough to determine if Airbnb’s distinction is contributing to the increase in passenger levels, but being on the list is obviously something the city’s tourism organisation can use in their marketing materials.

Improved connectivity could also be helping to support the hotel industry, which reported mostly positive year-over-year results in the three key performance metrics during the second quarter of 2019, according to data from benchmarking specialist STR. While, occupancy levels slipped year-on-year by -0.4% to 68.3%, average daily rate (ADR) was up +2.6% to CAD167.71 and revenue per available room (RevPAR) grew +2.1% to CAD114.52.

STR analysts attribute the dip in occupancy to supply growth (+1.4%) and comparisons with a strong quarter last year, which was boosted by an influx of visitors for anniversary celebrations around the country. Full-year forecasts for Canada suggest a slowdown in occupancy because of new inventory, but rates are expected to grow as that new supply is expected to raise the rate ceiling for the country.

It seems the perfect time for around 250 senior executives from airlines, airports and industry suppliers to be meeting in Winnipeg for the inaugural CAPA Canada Aviation Summit in early Sep-2019 as CAPA extends its event footprint further into the Americas.

As the foremost authority on aviation in the world, CAPA – Centre for Aviation’s events provide cutting edge knowledge about strategic market trends and dynamics to help attendees make informed decisions, delivering the information and connections needed to inspire and improve business. The CAPA Canada Aviation Summit will take place in Winnipeg on 09-10 September 2019.

This event, hosted at the Fairmont Winnipeg hotel in the vibrant heart of downtown Winnipeg, is a must attend for those seeking to learn from, network and collaborate with today’s travel industry leaders!